SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 27, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission file no. 1-11107
FRANKLIN COVEY CO.
(Exact name of registrant as specified in its charter)
Utah 87-0401551
(State of incorporation) (I.R.S. Employer Identification No.)
2200 West Parkway Boulevard
Salt Lake City, Utah 84119
(Address of principal executive offices) (Zip code)
Registrant's telephone number,
including area code: (801) 817-1776
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X
---
No
---
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock as of the latest practicable date:
20,626,715 shares of Common Stock as of June 30, 2000
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANKLIN COVEY CO.
---------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
May 27, August 31,
2000 1999
----- ----
(unaudited)
ASSETS
------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 22,652 $ 26,781
Accounts receivable, less allowance for
doubtful accounts of $3,307 and $4,074 43,867 92,500
Inventories 59,281 59,780
Income taxes receivable 3,167 3,912
Other assets 30,003 28,673
---------- ----------
Total current assets 158,970 211,646
Property and equipment, net 119,296 127,863
Goodwill and other intangibles, net 262,024 267,185
Other long-term assets 18,616 16,609
---------- ----------
$ 558,906 $ 623,303
========== ==========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
<S> <C> <C>
Accounts payable $ 22,672 $ 33,038
Accrued acquisition earnouts 15,900
Accrued restructuring costs 10,610 16,200
Current portion of long-term debt
and capital lease obligations 7,863 90,568
Other accrued liabilities 55,027 47,802
---------- ----------
Total current liabilities 96,172 203,508
Line of credit 50,000
Long-term debt and capital lease obligations,
less current portion 7,825 6,543
Deferred income taxes 34,818 34,818
---------- ----------
Total liabilities 188,815 244,869
---------- ----------
Shareholders' equity:
Preferred stock - Series A, no par value;
convertible into common stock at $14 per
share; 4,000,000 shares authorized, 811,088
and 750,000 shares issued 80,967 75,000
Common stock, $0.05 par value, 40,000,000
shares authorized, 27,055,894 shares issued 1,353 1,353
Additional paid-in capital 225,737 235,632
Retained earnings 184,320 199,125
Notes receivable from sale of common stock (1,069)
Deferred compensation (111) (320)
Accumulated other comprehensive loss (890) (782)
Treasury stock at cost, 6,468,536 and 6,676,373
shares (120,216) (131,574)
---------- ----------
Total shareholders' equity 370,091 378,434
---------- ----------
$ 558,906 $ 623,303
========== ==========
</TABLE>
(See Notes to Consolidated Condensed Financial Statements)
2
<PAGE>
<TABLE>
<CAPTION>
FRANKLIN COVEY CO.
---------------------------
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Quarter Ended Nine Months Ended
-------------------------------- -------------------------------
May 27, May 29, May 27, May 29,
2000 1999 2000 1999
------------- ------------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales $ 110,759 $ 109,267 $ 399,861 $ 386,718
Cost of sales 53,049 50,745 173,998 162,638
--------- --------- --------- ---------
Gross margin 57,710 58,522 225,863 224,080
Selling, general and administrative 65,399 54,647 189,795 167,168
Stock option purchase and relocation costs 8,763 10,921
Restructuring costs (402) (402)
Depreciation and amortization 11,042 10,003 31,461 28,435
--------- --------- --------- ---------
Income (loss) from operations (27,092) (6,128) (5,912) 28,477
Interest expense, net (1,005) (1,794) (3,661) (6,279)
Other income 396 396
--------- --------- --------- --------
Income (loss) before income taxes (27,701) (7,922) (9,177) 22,198
Provision (benefit) for income taxes (8,867) (3,327) (350) 9,323
--------- --------- --------- ---------
Net income (loss) (18,834) (4,595) (8,827) 12,875
Preferred stock dividends 2,028 5,978
--------- --------- --------- ---------
Net income (loss) available to common
shareholders $ (20,862) $ (4,595) $ (14,805) $ 12,875
========= ========= ========= =========
Net income (loss) per share:
Basic $ (1.02) $ (.22) $ (.73) $ .61
Diluted (1.02) (.22) (.73) .60
Weighted average number of common and
common equivalent shares:
Basic 20,413 20,522 20,377 21,252
Diluted 20,413 20,522 20,377 21,461
</TABLE>
(See Notes to Consolidated Condensed Financial Statements)
3
<PAGE>
FRANKLIN COVEY CO.
-----------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
May 27, May 29,
2000 1999
----- ----
(unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ (8,827) $ 12,875
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 34,223 31,763
Other 11 1,350
Changes in assets and liabilities, net of effects from
acquisitions:
Decrease in accounts receivable 45,520 29,799
Increase in inventories (1,739) (15,193)
Increase in other assets (2,760) (4,933)
Decrease in accounts payable and accrued liabilities (5,984) (16,666)
Increase (decrease) in income taxes payable 745 (12,527)
--------- ----------
Net cash provided by operating activities 61,189 26,468
--------- ---------
Cash flows from investing activities:
Acquisition of businesses and earnout payments (20,853) (19,025)
Proceeds from sale of commercial printing division assets 6,406
Purchases of property and equipment (13,479) (17,849)
Proceeds from the sale of property and equipment 602
--------- ---------
Net cash used for investing activities (27,324) (36,874)
--------- ---------
Cash flows from financing activities:
Net (decrease) increase in short-term borrowings (1,396) 8,386
Proceeds from long-term debt and line of credit 71,244 30,727
Payments on long-term debt and capital leases (108,667) (3,528)
Proceeds from issuance of preferred stock, net 4,092
Payment of preferred dividends (3,950)
Purchases of common stock for treasury (5,308) (32,709)
Proceeds from treasury stock issuance 5,877 1,604
--------- ---------
Net cash (used for) provided by financing activities (38,108) 4,480
--------- ---------
Effect of foreign exchange rates 114 1,142
--------- ---------
Net decrease in cash and cash equivalents (4,129) (4,784)
Cash and cash equivalents at beginning of period 26,781 27,760
--------- ---------
Cash and cash equivalents at end of period $ 22,652 $ 22,976
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 5,488 $ 8,812
Income taxes paid 5,422 21,453
Fair value of assets acquired $ 20,853 $ 19,025
Cash paid for net assets (20,853) (19,025)
--------- ---------
Liabilities assumed from acquisitions $ - $ -
--------- ---------
Non-cash investing and financing activities
Accrued preferred dividends $ 2,028
Preferred dividends paid with additional shares of preferred stock 1,875
Notes receivable issued from sale of common stock 894
Notes payable issued for the acquisition of business 6,000
(See Notes to Consolidated Condensed Financial Statements)
</TABLE>
4
<PAGE>
FRANKLIN COVEY CO.
------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
Franklin Covey Co. (the "Company") provides integrated training and
performance solutions to organizations and individuals in productivity,
leadership, sales performance, communication and other areas. Each solution set
may include components for training and consulting, assessment and other
application tools that are generally available in electronic or paper-based
formats. The Company's products and services are available through professional
consulting services, public workshops, catalogs, retail stores and the Internet
at www.franklincovey.com. The Company's best known products include the Franklin
Planner(TM) and the best-selling book,"The 7 Habits of Highly Effective People."
The attached unaudited consolidated condensed financial statements
reflect, in the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial position
and results of operations of the Company as of the dates and for the periods
indicated. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to
Securities and Exchange Commission ("SEC") rules and regulations. The Company
suggests the information included in this Report on Form 10-Q be read in
conjunction with the financial statements and related notes included in the
Company's Annual Report to Shareholders for the fiscal year ended August 31,
1999.
The Company utilizes a modified 52/53 week fiscal year that ends on
August 31. The Company's quarterly reporting periods generally consist of
13-week periods that ended on November 27, 1999, February 26, 2000 and May 27,
2000 during fiscal 2000. The quarter ended May 27, 2000 included one less
business day, while the nine months ended May 27, 2000 had two less business
days, than the corresponding periods of the prior year.
The results of operations for the quarter and nine months ended May 27,
2000 are not necessarily indicative of results for the entire fiscal year ending
August 31, 2000.
In order to conform with the current period presentation, certain
reclassifications have been made in the prior period financial statements.
NOTE 2 - INVENTORIES
Inventories were comprised of the following (in thousands):
May 27, August 31,
2000 1999
---------- ----------
(unaudited)
Finished goods $ 42,633 $ 42,594
Work in process 3,278 4,186
Raw materials 13,370 13,000
----------- -----------
$ 59,281 $ 59,780
=========== ===========
5
<PAGE>
NOTE 3 - RESTRUCTURING COSTS
During the fourth quarter of fiscal 1999, the Company initiated a plan
to restructure its operations, reduce its workforce and formally exit the
majority of its leased office space in Provo, Utah. In connection with the
restructuring plan, the Company recorded a restructuring charge of $16.3 million
during the fourth quarter of fiscal 1999. Included in the restructuring charge
were costs to provide severance and related benefits as well as costs to
formally exit the leased office space. The following is a summary of the change
in accrued restructuring costs for the nine months ended May 27, 2000 (in
thousands):
<TABLE>
<CAPTION>
Leased Office
Severance Costs Space Exit Costs Total
----------------- ----------------- -----------------
Accrued restructuring costs at
<S> <C> <C> <C>
August 31, 1999 $ 11,600 $ 4,600 $ 16,200
Restructuring costs paid (unaudited) (3,835) (1,353) (5,188)
Adjustments (unaudited) (402) (402)
----------- ----------- -----------
Accrued restructuring costs as of
May 27, 2000 (unaudited) $ 7,765 $ 2,845 $ 10,610
=========== =========== ===========
</TABLE>
The cost to provide severance and related benefits covers a planned
reduction of 600 employees from all areas of Company operations and corporate
support. As of May 27, 2000, a total of 391 employees had left the Company as
part of the reduction plan. The following table shows the number of employees in
each of the Company's operating segments that have been affected by the
reduction plan through May 27, 2000:
<TABLE>
<CAPTION>
Operating Segment Number of Employees
--------------------------------------------- -------------------------------------------
<S> <C>
Consumer Products 114
Training and Education 116
International 28
Corporate Support and Other 133
----------
391
==========
</TABLE>
During the quarter ended May 27, 2000, the Company entered into a
sublease agreement for the majority of its leased office space in Provo, Utah.
As a result, the Company reduced the accrual for exiting the leased office space
by $0.4 million due to less building transition costs than expected. The Company
will continue to monitor and adjust its restructuring reserves as necessary.
NOTE 4 - SHAREHOLDERS' EQUITY
In October 1998, the Company's Board of Directors approved the purchase
of up to 2,000,000 shares of the Company's common stock. During the nine months
ended May 27, 2000, the Company purchased 678,000 shares of its common stock for
a total of $5.3 million. During the quarter ended May 27, 2000, the Company sold
650,000 of these shares of common stock to the management stock loan program
(Note 10) for $5.1 million, which was the fair market value of the shares sold.
As of May 27, 2000, the Company had approximately 307,000 shares remaining to
purchase under the board-authorized plan.
6
<PAGE>
NOTE 5 - COMPREHENSIVE INCOME
Comprehensive income includes net income (loss) and other revenues,
expenses, gains and losses that are excluded from net income (loss) but are
included as components of shareholders' equity. Comprehensive income for the
Company is as follows (in thousands):
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
---------------------------------- ----------------------------------
May 27, May 29, May 27, May 29,
2000 1999 2000 1999
-------------- --------------- --------------- ---------------
(unaudited) (unaudited)
Net income (loss) available to common
<S> <C> <C> <C> <C>
shareholders $ (20,862) $ (4,595) $ (14,805) $ 12,875
Other comprehensive income (loss):
Foreign currency translation adjustments (409) 217 (108) 1,144
--------- --------- --------- ---------
Comprehensive income (loss) $ (21,271) $ (4,378) $ (14,913) $ 14,019
========= ========= ========= =========
</TABLE>
NOTE 6 - NET INCOME PER COMMON SHARE
Basic earnings per share ("EPS") is calculated by dividing income
(loss) available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS is calculated by dividing net
income (loss) by the weighted-average number of common shares outstanding plus
the assumed exercise of all dilutive securities using the treasury stock or the
"as converted" method as appropriate. The Diluted EPS calculation for the
quarter and nine months ended May 27, 2000 excludes the impact of stock options
and preferred stock because they are antidilutive. Incremental shares from the
assumed exercise of stock options excluded from the Diluted EPS calculation
totaled 94,217 and 89,506 shares for the quarter and nine months ended May 27,
2000, respectively. A total of 134,287 incremental shares were excluded from the
Diluted EPS calculation for the quarter ended May 29, 1999. The common share
equivalents of the preferred stock, on an "as converted" basis, excluded from
the Diluted EPS calculation totaled 5,793,529 at May 27, 2000. Significant
components of the numerator and denominator used for Basic and Diluted EPS are
as follows (in thousands, except per share amounts):
7
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
---------------------------------- ----------------------------------
May 27, May 29, May 27, May 29,
2000 1999 2000 1999
-------------- --------------- --------------- ---------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net income (loss) $ (18,834) $ (4,595) $ (8,827) $ 12,875
Preferred dividends 2,028 5,978
--------- --------- --------- ---------
Net income (loss) available to common
shareholders $ (20,862) $ (4,595) $ (14,805) $ 12,875
========== ========== ========== =========
Basic weighted-average
shares outstanding 20,413 20,522 20,377 21,252
Incremental shares from assumed
exercises of stock options 209
--------- --------- --------- ---------
Diluted weighted-average shares
outstanding and common stock equivalents 20,413 20,522 20,377 21,461
========= ========= ========= =========
Net income per share:
Basic $ (1.02) $ (.22) $ (.73) $ .61
Diluted (1.02) (.22) (.73) .60
</TABLE>
NOTE 7 - SEGMENT INFORMATION
The Company has aligned its business operations into the following
three operating segments or Strategic Business Units ("SBUs"):
o Consumer Products
o Training and Education
o International
Although the Company is currently in the process of restructuring its
operations, the above SBUs remain the primary management tool until the new
reporting structure is completed and implemented. The Consumer Products SBU is
responsible for distribution of the Company's products through retail stores,
catalog sales, mass markets, wholesale channels, government channels and the
Internet. The Training and Education SBU, which includes Premier Agendas
("Premier") and personal coaching, is responsible for training, consulting and
implementation services, and delivery of products to corporations, business,
government and educational institutions. The International SBU is responsible
for the delivery of both products and services outside the United States. The
"All Others" group consists primarily of Publishers Press, whose commercial
division assets were sold effective February 28, 2000. Intersegment sales
consist primarily of paper planner sales from Franklin Covey Printing to related
Franklin Covey entities, which prepare and package the planners for sale to
external customers. Corporate expenses consist primarily of essential internal
support services such as finance, legal, information systems, manufacturing and
distribution that are allocated to the operational SBUs.
The Company's chief operating decision-maker is the Chief Executive
Officer ("CEO"). Each of the reportable segments and corporate support
departments has an executive vice-president who reports directly to the CEO. The
Company accounts for its segment information on the same basis as the
accompanying consolidated condensed financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
SEGMENT INFORMATION
(in thousands)
Reportable Business Segments
--------------------------------------------------------
Corporate,
Training Adjustments
QUARTER ENDED Consumer and and
MAY 27, 2000 Products Education International Total All Others Elimination Consolidated
---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to external customers $ 63,030 $ 36,405 $ 9,925 $ 109,360 $ 1,399 $ 110,759
Intersegment sales 6,731 $ (6,731)
Gross margin 29,878 23,164 6,285 59,327 289 (1,906) 57,710
Stock option purchase and
relocation costs 8,763 8,763
Restructuring costs (402) (402)
Depreciation and
amortization 4,911 5,131 471 10,513 529 11,042
Segment earnings before
interest and taxes (7,487) (7,786) (2,211) (17,484) (478) (9,130) (27,092)
Segment assets 75,101 262,318 23,926 361,345 32,791 164,770 558,906
QUARTER ENDED
MAY 29, 1999
---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
Sales to external customers $ 51,661 $ 38,941 $ 11,214 $ 101,816 $ 7,451 $ 109,267
Intersegment sales 8,580 $ (8,580)
Gross margin 28,073 25,629 6,661 60,363 729 (2,570) 58,522
Depreciation and
amortization 3,993 4,668 499 9,160 843 10,003
Segment earnings before
interest and taxes (2,406) (2,526) (590) (5,522) (635) 29 (6,128)
Segment assets 68,011 259,834 27,798 355,643 57,077 169,747 582,467
NINE MONTHS ENDED
MAY 27, 2000
---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
Sales to external customers $ 235,346 $ 110,136 $ 38,572 $ 384,054 $ 15,807 $ 399,861
Intersegment sales 19,397 $ (19,397)
Gross margin 133,860 70,350 25,315 229,525 1,724 (5,386) 225,863
Stock option purchase and
relocation costs 10,921 10,921
Restructuring costs (402) (402)
Depreciation and
amortization 13,361 14,976 1,389 29,726 1,735 31,461
Segment earnings before
interest and taxes 29,272 (24,637) 709 5,344 (1,144) (10,112) (5,912)
NINE MONTHS ENDED
MAY 29, 1999
---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
Sales to external customers $ 210,973 $ 113,102 $ 39,925 $ 364,000 $ 22,718 $ 386,718
Intersegment sales 24,596 $ (24,596)
Gross margin 125,241 73,408 25,550 224,199 2,125 (2,244) 224,080
Depreciation and
amortization 10,957 13,764 1,467 26,188 2,247 28,435
Segment earnings before
interest and taxes 37,772 (11,999) 1,675 27,448 (1,848) 2,877 28,477
</TABLE>
The primary measurement tool in segment performance analysis is
earnings before interest and taxes ("EBIT"). Other significant non-recurring
charges, consisting primarily of stock option purchases, costs to relocate the
sales force and restructuring charges, are not allocated to SBUs to enhance
comparability. Interest expense is primarily generated at the corporate level
and is not allocated to the reporting segments. Income taxes are likewise
9
<PAGE>
calculated and paid on a corporate level (except for entities that operate
within foreign jurisdictions and are not allocated to reportable segments. A
reconciliation of reportable segment EBIT to consolidated EBIT is presented
below:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
---------------------------------- ----------------------------------
May 27, May 29, May 27, May 29,
2000 1999 2000 1999
-------------- -------------- --------------- -------------
(unaudited) (unaudited)
Reportable segment
<S> <C> <C> <C> <C>
EBIT $ (17,484) $ (5,522) $ 5,344 $ 27,448
All others EBIT (478) (635) (1,144) (1,848)
Corporate items:
Stock option purchase
and relocation costs (8,763) (10,921)
Restructuring costs 402 402
Intercompany rent charges 1,643 1,711 5,065 5,133
Other (2,412) (1,682) (4,658) (2,256)
------------- ------------- ------------- -------------
Consolidated EBIT $ (27,092) $ (6,128) $ (5,912) $ 28,477
============= ============= ============= =============
</TABLE>
Other corporate items are comprised primarily of unallocated
manufacturing costs and other eliminated or unallocated intercompany amounts.
During the first quarter of fiscal 2000, the Company revised pricing on
intercompany planner sales, resulting in a change to segment operations. The
effects of the pricing change on the prior year were not practically estimable
and prior year segment results have not been restated to reflect the change.
Corporate assets such as cash, accounts receivable, fixed assets and
other assets are not generally allocated to reportable business segments for
business analysis purposes. However, inventories, goodwill and identifiable
fixed assets (primarily leasehold improvements in retail stores and
manufacturing equipment) are classified by segment. Intangible assets generated
from the Covey merger are primarily allocated to the Training and Education SBU.
NOTE 8 - SALE OF PUBLISHERS PRESS COMMERCIAL DIVISION ASSETS
Effective February 28, 2000, the first day of the quarter ended May 27,
2000, the Company sold the assets and substantially all of the business of its
commercial printing division of Publishers Press. The Company has retained
printing operations related to the production of its planners and other related
products (now "Franklin Covey Printing"). The final sale price, after
adjustments under terms of the purchase agreement, was $13.4 million and
consisted of $11.0 million in cash and a $2.4 million note payable to the
Company over 5 years. The note payable is secured by property and other assets
specified in the purchase agreement. The Company recognized a $0.3 million gain
from the sale of these assets, which is included as a component of other income
in the accompanying Consolidated Condensed Statement of Operations.
NOTE 9 - STOCK OPTION PURCHASE AND RELOCATION COSTS
During the quarter and nine months ended May 27, 2000, the Company has
incurred and expensed $8.8 million and $10.9 million, respectively, for other
costs related to its restructuring plan which were not specific to severance or
leased office space exit costs. These costs were primarily comprised of charges
related to the stock option tender offer and other purchases of outstanding
stock options, and to relocate salespeople to new regional sales offices. As
these costs are non-recurring in nature, they have been included as a separate
expense component in the accompanying Consolidated Condensed Statement of
10
<PAGE>
Income. During fiscal 2000, the Company has been actively purchasing outstanding
stock options in an effort to reduce the potentially dilutive effect of the
options on the Company's capital structure. As part of this strategy, the
Company filed Form SC TO-I, Schedule to Tender Offer Statement Under Section
13(E)(I) of the Securities Exchange Act of 1934, with the SEC on March 15, 2000
(final amendment filed on May 8, 2000). The tender offer expired on May 3, 2000
with a total of 2,319,000 shares tendered. Under terms of the offer, the Company
paid cash for the outstanding options, which were priced using a market
valuation methodology. The total cost of the tender offer was $6.9 million. In
addition to the tender offer, the Company had previously purchased outstanding
stock options of both current and former employees. The total cost of options
purchased during the quarter ended May 27, 2000 was $7.6 million. As a result of
the tender offer and previous purchases of option shares, the Company has
reacquired 3,314,000 shares at a total cost of $8.7 million during fiscal 2000.
The remaining $1.2 million and $2.2 million of expense incurred during the
quarter and nine months ended May 27, 2000, respectively, relates primarily to
the relocation of sales associates to eight regional sales offices. At June 30,
2000, six of the regional sales offices were operational and the Company expects
the remaining two to be operational by the end of July 2000. As the Company
continues to implement its restructuring plan, the Company may incur additional
relocation and related expenses through the remainder of fiscal 2000.
NOTE 10 - MANAGEMENT COMMON STOCK LOAN PROGRAM
During the quarter ended May 27, 2000, the Company announced the
implementation of an incentive-based compensation program that includes a loan
program from external lenders. The program gives management of the Company the
opportunity to purchase shares of the Company's common stock on the open market,
and from shares recently purchased by the Company, by borrowing on a
full-recourse basis from the external lenders. The Company has facilitated the
loans to individuals by providing a guarantee to the lenders extending the loans
and has paid $0.2 million for documentation, legal and other bank fees. The
program will total approximately $31.0 million and the Company will facilitate
the purchase of open-market shares to ensure compliance with appropriate SEC
trading rules and regulations. As of May 27, 2000, the Company was still in the
process of acquiring shares of its common stock to complete the loan program.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements, the Notes thereto and Management's Discussion
and Analysis included in the Company's Annual Report to Shareholders for the
year ended August 31, 1999.
RESULTS OF OPERATIONS
The following table sets forth the sales of the Company's SBUs for the
periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
-------------------------------------------- --------------------------------------------
May 27, May 29, May 27, May 29,
2000 1999 Variance % 2000 1999 Variance %
------ ------ ------ ------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consumer Products $ 63,030 $ 51,661 22 $ 235,346 $ 210,973 12
Training and Education 36,405 38,941 (7) 110,136 113,102 (3)
International 9,925 11,214 (11) 38,572 39,925 (3)
Other 1,399 7,451 (81) 15,807 22,718 (30)
---------- ---------- ---------- ----------
$ 110,759 $ 109,267 1 $ 399,861 $ 386,718 3
========== ========== ========== ==========
</TABLE>
The SEC recently released Staff Accounting Bulletin ("SAB") No. 101,
which specifies rules for revenue recognition. The Company is currently
assessing the impact of adopting SAB No. 101, which will be effective during the
Company's fiscal year ending August 31, 2001.
Quarter Ended May 27, 2000 Compared with the Quarter Ended May 29, 1999
-----------------------------------------------------------------------
Consumer Products sales increased $11.4 million, or 22 percent,
compared to the prior year. Sales increases from the Company's retail stores,
wholesale channels and the Internet were partially offset by decreased sales
from government products and the catalog. Retail store sales increased due to
three additional stores and a 23 percent increase in comparable store sales. As
of May 27, 2000, the Company was operating 128 retail stores compared to 125
stores at May 29, 1999. Comparable store sales growth was primarily driven by
increased sales of electronic handheld products, such as the Palm V(TM) by Palm
Inc., bundled with the Company's Franklin Planner(TM) software, as well as sales
of related accessories. Sales of handheld electronic devices through various
Company channels represented a significantly larger percentage of Consumer
Product sales compared to the prior year. As the popularity of handheld
electronic devices continues to increase, the Company anticipates further sales
growth from these devices. However, future sales growth is dependent upon a
number of factors, including the availability of handheld electronic devices
from manufacturers and the introduction of new products by competitors. The
Company also had increased sales from its wholesale channels (including the
contract stationer channel) primarily due to increased demand from its marketing
and distribution agreements, the successful introduction of new products and the
addition of new distribution contracts. Increased Internet sales were the result
of continuing changes in general consumer buying habits, ongoing improvements to
the Company's electronic commerce infrastructure and web site at
www.franklincovey.com, and special promotions advertised on the web site and in
the Company's catalogs. Increased sales in these channels were partially offset
by decreased sales from government products and the catalog. Government product
sales have decreased primarily due to continued uncertainties surrounding the
potential closure of certain General Services Administration ("GSA") depots and
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service centers. Catalog sales continue to be unfavorably affected by increased
Internet channel sales, which the Company attributes to continuing changes in
consumer buying preferences. However, Internet sales combined with catalog sales
increased 14 percent compared to the prior year.
Training and Education sales decreased by $2.5 million, or 7 percent,
compared to the prior year. Increased sales training and leadership program
sales were offset by decreased sales from productivity programs and the
Company's personal coaching division. Increased sales training revenue was due
to new contracts and increased demand for sales performance seminars taught by
Khalsa Associates, which was acquired in fiscal 1999. Increased leadership
seminar sales are the result of improved organizational sales and related
business development program sales. Productivity seminar sales decreased
compared to the prior year principally due to the timing of special customized
orders in the prior year and continued sales force disruptions due to
organizational changes and relocation of the sales force to regional sales
offices. As of June 30, 2000 the Company had opened six of eight planned
regional sales offices, and the Company anticipates having all regional sales
offices open by the end of July 2000. In addition to relocating existing sales
people to the new offices, the Company is actively engaged in hiring new sales
associates to improve sales opportunities. As the Company continues to relocate
and reorganize its sales force, sales of productivity and leadership seminars
may continue to be adversely affected. Decreased personal coaching sales were
primarily due to decreased demand for coaching on one of its major client's
programs.
International sales decreased $1.3 million, or 11 percent, compared to
the prior year. Increased sales from Canada were offset by decreases in
Australia, Japan, the Middle East, Mexico and New Zealand. Increased sales in
Canada were primarily due to increased training sales resulting from additional
sales personnel that were recently hired to expand Company operations in Canada.
Decreased sales in Australia were due to training volume decreases at one of
Australia's largest customers and the timing of speaking engagements by Stephen
R. Covey, which increased training sales in the prior year. Sales in Japan
declined primarily due to the discontinuance of the publishing business and
lower training sales. The Company is in the process of reorganizing its sales
force in Japan, and may continue to experience decreased training sales through
the remainder of fiscal 2000. Decreased sales in the Middle East were due to the
Company changing its business strategy in the Middle East from a direct office
to a licensee operation. The Company now receives a royalty based upon a
percentage of the licensee's sales rather than recognizing 100 percent of region
sales. Decreased sales in Mexico and New Zealand were primarily due to decreased
training sales resulting from restructuring activities in those countries.
Other sales, which consist primarily of the Company's commercial
printing and tabbing services, decreased $6.1 million, or 81 percent, compared
to the prior year. The decrease was due to the sale of the commercial printing
division of Publishers Press, which was sold effective February 28, 2000, the
first day of the quarter ended May 27, 2000.
Gross margin was 52.1 percent of sales for the quarter, compared to
53.6 percent in the prior year. Consistent with prior quarters, the Company's
gross margin was unfavorably affected by changes in the product mix, decreased
training sales and increased wholesale channel sales. As described above, the
Company experienced increased sales of handheld electronic devices during the
quarter. These handheld devices have gross margins that are lower than the
majority of the Company's other products and services. As sales of handheld
electronic devices continue to grow, and increase as a percentage of total
Company sales, further gross margin erosion may occur. In addition, decreased
sales of higher margin training programs also unfavorably affected the Company's
gross margin. Increased sales through wholesale channels continues to adversely
affect the Company's gross margin through contracted pricing terms that have
produced increased sales volume, but at lower margins.
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Selling, general and administrative ("SG&A") expenses increased $10.8
million, to 59.0 percent of sales, compared to 50.0 percent in the prior year.
The increase was primarily due to ongoing development of electronic-based
products, electronic commerce channels, spending to support expected growth in
the Premier business, newly acquired businesses, increased promotional expenses,
increased consulting costs associated with new projects and incentive programs
at the retail stores. These increases were partially offset by a decrease in
core associate costs as a result of headcount reduction efforts. Consistent with
prior quarters of fiscal 2000, the Company continued to aggressively invest in
the development and marketing of new electronic-based products, online training
programs and various application tools. Due to the significant increase in
handheld electronic devices and related accessories, the Company has also
increased its customer support services for these products. In addition, the
Company has continued to improve its electronic commerce infrastructure to meet
changing consumer preferences and has committed significant resources to the
development of its Internet web site and other online products and services,
such as Franklinplanner.com. The Company believes that the development of online
products and services, combined with an efficient e-commerce base will enable it
to achieve a competitive advantage in the future by providing a variety of tools
in various formats to enable organizations and individuals to craft effective
solutions to meet their needs. Premier, which develops and produces planners and
other solutions in the educational market, increased its SG&A spending as a
result of a new regional office and additional headcount necessary to support
expected growth in fiscal 2000 and beyond. The purchases of the Professional
Resources Organization and DayTracker.com, which were acquired during fiscal
2000, have also resulted in increased total SG&A expenses compared to the prior
year. The Company also increased its promotional spending, primarily for
catalogs and direct mailings, to advertise new products and to improve public
program sales. As part of the Company's restructuring plan, consultants have
been engaged to assist the Company with projects such as improving brand
recognition, improving collection of accounts receivable, expanding European
operations and other related projects that are designed to position the Company
for profitable growth in the future. Incentive programs, linked to the sale of
handheld electronics and related accessories, at the Company's retail stores
also had an unfavorable impact on SG&A expenses during the quarter.
During the quarter ended May 27, 2000, the Company announced a tender
offer to purchase all outstanding options to purchase the Company's common stock
priced at $12.25 per share and higher. Under terms of the offer, the Company
paid cash for the outstanding options, which were priced using a market
valuation methodology. A total of 2,319,000 shares were tendered in connection
with the offer at a total cost of $6.9 million. In addition to the tender offer,
the Company had previously purchased outstanding stock options of both current
and former employees. The total cost of options purchased during the quarter
ended May 27, 2000 was $7.6 million. Another $1.2 million was expensed during
the quarter primarily related to the relocation of the sales force to eight new
regional sales offices. Partially offsetting these expenses, the Company reduced
its leased office space exit accrual by $0.4 million as a result of favorable
transition costs associated with the sublease agreement for the majority of the
Company's leased office space located in Provo, Utah. As the Company continues
to implement its restructuring plan, additional relocation and related expenses
may be incurred throughout the remainder of fiscal 2000.
Depreciation charges increased by $0.4 million over the prior year,
primarily due to the purchase of computer hardware and software, the addition of
leasehold improvements in new stores and leased office space, office furniture
and fixtures, and manufacturing machinery and equipment. Amortization charges
increased by $0.7 million, primarily due to the amortization of contingent
earnout payments made to the former owners of Premier and personal coaching, as
well as the acquisition of DayTracker.com.
Effective February 28, 2000, the Company sold the assets of the
commercial printing division of Publishers Press. The Company retained printing
operations related to the manufacture of its planners and related paper
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products. The sales price was $13.4 million, which was paid in cash and a
secured promissory note for $2.4 million. The Company recognized a $0.3 million
gain on the sale, which has been included as a component of other income in the
accompanying Condensed Consolidated Statement of Operations.
Income tax benefit was recognized based upon estimated taxable income
for the remainder of fiscal 2000 and the effects of non-deductible goodwill
amortization on the Company's effective tax rate. Non-deductible goodwill
amortization from previous acquisitions and related contingent earnout payments
has an unfavorable impact on the Company's tax rate as taxable income declines.
Nine Months Ended May 27, 2000 Compared to the Nine Months Ended May 29, 1999
-----------------------------------------------------------------------------
Consumer Products sales increased $24.4 million, or 12 percent,
compared to the prior year. Sales increases from the Company's retail stores,
wholesale channels and the Internet were partially offset by sales decreases
from the catalog, mass market and government products channels. Retail store
sales increased primarily due to the addition of three new stores and a 14
percent increase in comparable store sales. Retail store sales increases were
primarily driven by increased sales of handheld electronic devices and related
accessories. The Company also had increased sales from its wholesale channels
(including the contract stationer channel) resulting from increased demand, new
product introductions and new distribution agreements. Sales from the Internet
channel have increased primarily due to general changes in consumer buying
habits and ongoing enhancements to the Company's electronic commerce
infrastructure and web site. Increased sales from these channels were partially
offset by decreased sales from the catalog, mass market and government products
channels. Catalog sales continue to be adversely affected by a shift in consumer
buying habits that has resulted in increased Internet sales. However, catalog
sales combined with sales through the Internet have increased 7 percent over the
prior year. Sales through the mass-market channel decreased due to the
termination of an agreement with a mass-market distributor. As a result of
unfavorable performance in the mass-market channel, the Company has thus far
declined to initiate further mass-marketing agreements in fiscal 2000.
Government product sales continue to be adversely affected by uncertainties
surrounding the potential closure of GSA depots and service centers.
Training and Education sales decreased by $3.0 million, or 3 percent,
compared to the prior year. Increased sales from Premier, sales training and
leadership programs were offset by decreases in productivity programs and at
personal coaching. Premier recognized increased sales, primarily during the
first quarter of fiscal 2000, due to the timing of school agendas shipped.
Increased sales training was due to the fiscal 1999 acquisition of Khalsa
Associates, a leading sales training company, which has experienced increasing
sales since its acquisition. Leadership programs have increased primarily due to
improved organizational program sales and related Business Development program
sales. Productivity seminar sales decreased due to the timing of special
customized orders in the prior year and by ongoing organizational restructuring
activities and the relocation of sales associates to new regional sales offices.
As of June 30, 2000, six of eight regional sales offices were operational, and
the Company expects the remaining two offices to be operational by the end of
July 2000. The adverse effects on seminar sales of relocating and reorganizing
the sales force are expected to continue throughout the remainder of fiscal
2000. Personal coaching sales decreased primarily due to decreased demand for
coaching on one of its client's programs.
International sales decreased by $1.4 million, or 3 percent, compared
to the prior year. Increased sales from Canada and Mexico were offset by
decreased sales from Australia, Japan, and the Middle East. Increased sales in
Canada were primarily due to increased training sales resulting from additional
sales personnel that were recently hired to expand Company operations in Canada,
while Mexico's sales increased primarily due to retail store sales growth and
marketing initiatives designed to improve product recognition in the Mexico City
15
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business district. Decreased sales in Australia were due to training volume
decreases at one of Australia's largest customers and the timing of speaking
engagements by Stephen R. Covey, which increased training sales in the prior
year. Sales in Japan declined primarily due to the discontinuance of the
publishing business and lower training sales. The Company is also in the process
of reorganizing its sales force in Japan, and may continue to experience
decreased training sales through the remainder of fiscal 2000. Decreased sales
in the Middle East were primarily due to the Company changing its business
strategy in the Middle East from a direct office to a licensee operation. The
Company now receives a royalty based upon a percentage of the licensee's sales
rather than recognizing 100 percent of region sales.
Other sales, which consist primarily of the Company's commercial
printing services, decreased $6.9 million, or 30 percent, compared to the prior
year. The decrease was due to the sale of the assets of the commercial printing
division of Publishers Press, which was effective February 28, 2000.
Gross margin declined to 56.5 percent of sales, compared to 57.9
percent in the prior year. The Company's gross margin continues to be adversely
affected by changes in product mix, decreased training sales and increased
wholesale channel sales. As described above, the Company has recognized
significantly increased sales of handheld electronic devices and accessories
that typically have gross margins which are lower than the majority of the
Company's other products and services. Decreased sales of higher margin training
programs have also unfavorably affected the Company's gross margin during fiscal
2000. Increased sales through the Company's wholesale channels continues to
erode the Company's overall gross margin due to contracted pricing terms that
have produced increased sales volume, but at lower gross margins.
Selling, general and administrative expenses increased $22.6 million to
47.5 percent of sales, compared to 43.2 percent of sales in the prior year. The
increase was primarily due to the ongoing development of electronic-based
products, electronic commerce channels, growth in the Premier business, newly
acquired businesses, additional promotional spending and increased consulting
costs. These increases were partially offset by a decrease in core associate
costs as the result of an overall reduction in headcount. During fiscal 2000,
the Company aggressively invested in the development and marketing of new
electronic-based products, online training programs and various application
tools. In addition, the Company has continued to incur costs to improve its
electronic commerce infrastructure to meet changing consumer preferences and has
committed significant resources to the development of its Internet web site and
other online products and services, such as Franklinplanner.com. Premier, which
develops and produces planners and other solutions in the educational market,
increased its SG&A spending as a result of a new regional office and the hiring
of additional associates to support expected growth in fiscal 2000 and beyond.
Total SG&A expenses have also increased due to the acquisitions of Professional
Resources Organization and DayTracker.com, both of which were acquired in fiscal
2000. The Company increased its promotional spending, primarily for catalogs and
direct mailings, to advertise new products and public seminar programs. During
the nine months ended May 27, 2000, the Company also initiated several new
projects related to areas such as improving brand recognition, improving
collection of accounts receivable and the expansion of European operations to
position the Company for profitable growth. The Company has incurred, and will
continue to incur during fiscal 2000, consulting costs necessary to complete
these projects.
During the nine months ended May 27, 2000, the Company expensed $10.9
million of additional costs primarily to reacquire outstanding stock options and
to relocate salespeople to eight new regional sales offices. Of this amount,
$8.7 million was used to purchase outstanding stock options, including $6.9
million in connection with the previously mentioned tender offer. As a result of
the tender offer and previous purchases of option shares, the Company has
reacquired 3,314,000 shares at a total cost of $8.7 million during fiscal 2000.
16
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The remaining $2.2 million of expense incurred during the nine months ended May
27, 2000, relates primarily to the relocation of sales associates to eight new
regional sales offices. At June 30, 2000, six of the regional sales offices were
operational and the Company expects the remaining two to be operational by the
end of July 2000. As the Company continues to implement its restructuring plan,
the Company may incur additional relocation and related expenses throughout the
remainder of fiscal 2000.
Depreciation charges increased by $1.4 million over the prior year,
primarily due to the purchase of computer hardware and software, manufacturing
equipment and the addition of leasehold improvements in new stores and regional
sales offices. Amortization charges increased by $1.6 million, primarily due to
the amortization of contingent earnout payments made to the former owners of
Premier and personal coaching, and the acquisition of DayTracker.com.
Effective February 28, 2000, the Company sold the assets of the
commercial printing division of Publishers Press. The Company retained printing
operations related to the manufacture of its planners and related forms. The
sales price was $13.4 million, which was paid in cash and a secured promissory
note for $2.4 million. The Company recognized a $0.3 million gain on the sale of
these assets, which has been included as a component of other income in the
accompanying Condensed Consolidated Statement of Operations.
Income tax benefit was recognized based upon estimated taxable income
for the remainder of fiscal 2000 and the effects of non-deductible goodwill
amortization on the Company's effective tax rate. Non-deductible goodwill
amortization from previous acquisitions and related contingent earnout payments
has an unfavorable impact on the Company's tax rate as taxable income declines.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary sources of capital have been net
cash provided by operating activities, long-term borrowings and line of credit
financing. Working capital requirements have also been financed through
short-term borrowing and line-of-credit financing. In addition to these sources,
the Company issued 750,000 shares of Series A preferred stock for $75.0 million
in cash to a private investor during the fourth quarter of fiscal 1999. In
connection with the issuance of the preferred stock, the Company filed a
registration statement with the SEC related to a subscription offering for up to
an additional 750,000 shares of preferred stock. Shareholders of record on
November 8, 1999 received a non-transferable right to purchase one share of
preferred stock for every 27 common shares owned, at a subscription price of
$100 per share. The preferred stock offered to shareholders was substantially
identical to the preferred stock issued during fiscal 1999 to the private
investor. The subscription offering closed on November 30, 1999 with 42,338
shares of Preferred Stock purchased under terms of the subscription offering.
Net proceeds from the subscription offering totaled $4.1 million.
Net cash provided by operating activities during the nine months ended
May 27, 2000 was $61.2 million, compared to $26.5 million in the prior year.
Adjustments to net loss included $34.2 million of depreciation and amortization
charges. The main source of cash from operations was the collection of accounts
receivable primarily from Premier, which has seasonally high sales during the
Company's fourth fiscal quarter, and the Company's core operations. The chief
use of cash was the payment of accounts payable and accrued liabilities,
primarily due to the seasonal nature of Premier's operations.
17
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Net cash used for investing activities totaled $27.3 million during the
first nine months of fiscal 2000, compared to $36.9 million in the prior year.
Of this amount, $13.5 million was used to purchase computer hardware and
software, manufacturing equipment, leasehold improvements and other property and
equipment. The Company used $16.3 million of cash to pay contingent earnout
payments to the former owners of Premier and personal coaching and $4.5 million
to purchase the operations of Professional Resources Organization and
DayTracker.com. During the quarter ended May 27, 2000, the Company sold the
assets of the commercial printing division of Publishers Press for $11.0 million
in cash and a $2.4 million secured note receivable. Net cash proceeds from the
sale totaled $6.4 million.
Net cash used for financing activities during the first nine months of
fiscal 2000 was $38.1 million compared to net cash proceeds of $4.5 million in
the prior year. The primary source and use of financing cash was related to the
retirement of certain notes payable and the expansion of the Company's line of
credit. At August 31, 1999, the Company had $85.0 million of senior unsecured
notes payable (the "Notes Payable") outstanding. The Notes Payable required the
Company to maintain certain financial ratios and net worth levels until the
Notes Payable were paid in full. Due to restructuring charges in the fourth
quarter of fiscal 1999, the Company was not in compliance with the terms of the
Notes Payable at August 31, 1999. The Company did not obtain a waiver on the
terms of the Notes Payable, and during the first quarter of fiscal 2000 the
Notes Payable were retired at par plus accrued interest. Also during the first
quarter of fiscal 2000, the Company obtained a new line of credit from existing
lenders that maintained the Company's $10.0 million short-term line of credit,
but increased the long-term line of credit to $100.0 million. The Company
utilized existing cash and its expanded line of credit to retire the Notes
Payable during the first quarter. The new line of credit requires the Company to
maintain certain financial ratios and minimum net worth levels, excluding the
impact of the fiscal 1999 restructuring charges and the effects of stock options
purchased in connection with the tender offer during the third quarter of fiscal
2000. As of May 27, 2000, the Company was in compliance with the terms of the
line of credit. The new line of credit agreement bears interest at the lesser of
the prime rate or the LIBOR rate plus 1.5%, and expires October 1, 2001. During
fiscal 2000, the Company purchased 678,000 shares of its common stock for
treasury at a cost of $5.3 million. The Company also received proceeds totaling
$5.9 million from the sale of treasury shares, primarily to the management stock
loan program and the Company's employee stock purchase plan. All shares sold to
the management stock purchase program were sold at fair market value. During the
nine months ended May 27, 2000, the Company paid $3.5 million in cash for
dividends on outstanding shares of preferred stock. At May 27, 2000, the Company
had $2.0 million of accrued preferred stock dividends that were subsequently
paid in cash.
Going forward, the Company will continue to incur costs necessary for
the development of online products, e-commerce channels, strategic acquisitions
and joint ventures, retail store buildouts and renovations, regional office
leasehold improvements, the purchase of certain outstanding options and other
costs related to the restructuring and growth of the business. Cash provided by
operations, available lines of credit and other financing alternatives will be
used for these expenditures. Management anticipates that its existing capital
resources will be sufficient to enable the Company to maintain its current level
of operations and its planned internal growth for the foreseeable future. The
Company also continues to pursue additional financing alternatives as it
repositions itself for future opportunities.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
-----------------------------
With the exception of historical information (information relating to
the Company's financial condition and results of operations at historical dates
or for historical periods), the matters discussed in this Management's
Discussion and Analysis of Financial Condition and Results of Operations are
forward-looking statements that necessarily are based on certain assumptions and
18
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are subject to certain risks and uncertainties. Such uncertainties include, but
are not limited to, unanticipated developments in any one or more of the
following areas: the integration of acquired or merged businesses, management of
growth, unanticipated costs, delays or outcomes relating to the Company's
restructuring plan, availability of financing sources, dependence on products or
services, the rate and consumer acceptance of new product introductions,
competition, the number and nature of customers and their product orders,
pricing, pending and threatened litigation, and other risk factors which may be
detailed from time to time in the Company's press releases, reports to
shareholders and in filings with the SEC.
These forward-looking statements are based on management's expectations
as of the date hereof, and the Company does not undertake any responsibility to
update any of these statements in the future. Actual future performance and
results will differ and may differ materially from that contained in or
suggested by these forward-looking statements as a result of the factors set
forth in this Management's Discussion and Analysis of Financial Condition and
Results of Operations, the business risks described in the Company's Annual
Report on Form 10-K for the year ended August 31, 1999 and elsewhere in the
Company's filings with the SEC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK OF FINANCIAL INSTRUMENTS
The Company has exposure to market risk from foreign currency exchange
rates and changes in interest rates. To manage the volatility related to
currency exchange rates, the Company has entered into limited derivative
transactions to manage well-defined foreign exchange risks. However, the
notional amount of the exchange contracts is immaterial and any default by
counterparties, although unlikely, would have an insignificant effect on the
Company's financial statements. As the Company continues to expand
internationally, the Company's use of foreign exchange contracts may grow in
order to manage the foreign currency risks to the Company. As of May 27, 2000,
the Company had not entered into derivative instruments to hedge its exposure to
interest rate risk.
EURO CONVERSION
On January 1, 1999, the European Monetary Union ("EMU"), which is
comprised of 11 out of the 15 member countries of the European Union, introduced
a new common currency, the "Euro." During the transition period between January
1, 1999 and January 1, 2002, both the Euro and national currencies will coexist.
The national currencies will remain legal tender until at least January 1, 2002,
but not later than July 1, 2002. The Company currently transacts business in EMU
countries using the national currencies and translates the financial results of
those countries in accordance with current accounting pronouncements. Further,
the Company has not experienced, nor does it expect to experience, a material
adverse impact on its financial condition, results of operations or liquidity as
a result of the Euro conversion.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings:
Not applicable
Item 2. Changes in Securities:
Not applicable
Item 3. Defaults upon Senior Securities:
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders:
Not applicable
Item 5. Other information:
Not applicable
Item 6. Exhibits and Reports on Form 8-K:
(A) Exhibits:
10.1 Partnership Interest Purchase Agreement between Franklin
Covey Co. and Daytracker.com dated December 8, 1999 (filed
as exhibit 10.1 in the Company's Quarterly Report on Form
10-Q dated November 27, 1999 and incorporated herein by
reference).
10.2 Schedule to Tender Offer Statement Under Section 13(E)(I) of
the Securities Exchange Act of 1934 (filed on Form SC TO-I
with the Securities and Exchange Commission on March 15,
2000, including amendments and incorporated herein by
reference).
10.3 Asset Purchase Agreement By and Among Publishers Press,
Inc., Franklin Covey Co., and Western Impressions
Corporation, dated as of February 15, 2000 (filed as exhibit
10.3 in the Company's Quarterly Report on Form 10-Q dated
February 26, 2000 and incorporated herein by reference).
27. Financial Data Schedule (filed herewith).
(B) Reports on Form 8-K: Not applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANKLIN COVEY CO.
Date: July 11, 2000 By: /s/ Robert A. Whitman
------------------- --------------------------------------------
Robert A. Whitman
Chief Executive Officer
Date: July 11, 2000 By: /s/ J. Scott Nielsen
-------------------- ---------------------------------------------
J. Scott Nielsen
Chief Accounting Officer
21
